Last Updated on December 16, 2023 by Asfa Rasheed
Every penny counts when it comes to running a successful business. Different thoughts cross our minds this time, and we think about whether we are going on the right track. So, it means that adaptability is the most significant hallmark for the survival of any business. Financial planning is the first thing that you should master to deal with different economic situations, climate changes, and whatnot. The key to running a business is increasing and decreasing profits. But before taking any action, you should start understanding the basics first. So, let’s start with this:
What is the operating cost of a business?
Operating cost is the total amount you pay to run business processes smoothly. We all know that it’s expensive to run and own a business. But there is a secret to success: operating costs should be a small fraction of revenue. Here are a few examples of the company operating expense
|Payroll for staff
|Building maintenance and repair cost
|Health insurance, employee pension, and other benefits
Sometimes, we can refer to operating costs as OPEX, as these are the maintenance and administrative expenses running a business daily. In simple terms, it’s a cost that isn’t directly associated with products or services but is necessary to run business operations. For instance, salaries fall into operating costs and any expenses you do for buying or using a paystub generator.
Operating cost ratio:
Operating cost is an ongoing expense that you do to keep the business in the running situation. So, to increase profitability, find ways to decrease operating expenses. In many areas operating costs are unavoidable, but there are plenty of ways to improve profit margins. Here is the formula that we use to calculate the operating expenses ratio:
Operating expense ratio = operating cost / total revenues
First, calculate the balance if you want to reduce costs. But the whole process should be done strategically as, in this way, you will not impact the ability of the company to generate profit.
How to reduce the operating cost of a business?
Many mistakes can kill a startup, and miscalculating expenses and revenue is one of the biggest. In many businesses, owners try to increase their sales and revenue to boost profitability. Small business owners can save money using this technique, but it doesn’t help large businesses. After calculating the operating cost ratios, you would know that the company needs to maintain healthy levels. However, here are a few tips that can help to bring this ratio to a healthy level.
Save money on insurance:
Insurance is one of the most significant financial expenses that a business pays. But this is the time to reevaluate your insurance package and enjoy extra savings. Always remember that the insurance industry is so competitive that you can always find better options. So, here are a few tips that you need to follow:
- Look for bundle deals
- Find offerings that are covered under one policy
- Go and check different options to find the best deal
- Get in touch with brokers to ensure you are getting a great deal
Apart from this, you can ask for suggestions from your friends and family. In this way, you can grab bundles that other people have tried.
Go for a four-day workweek:
Now the world plans to work on a new concept, a four-day workweek. In this model, there is a significant cost benefit because you only work four days a week. For instance, if you work for four days, then it automatically eliminates 20% of the overhead cost. However, in this way, you can save thousands of dollars on electricity, office supplies, and cleaning. Apart from this, the four-day workweek reduces the expenses of snacks, office food, and other facilities. Many top examples, like Microsoft, have reduced overhead costs by up to 40% by implementing a four-day workweek policy.
Automate tasks that consume more time:
It is another golden rule that improves efficiency and reduces overhead expenses. Dozens of online software like paystub generators, web hustings, and marketing tools make the tasks quick and easy. In this way, you don’t need to spend more money on labor; further, it boosts efficiency—the software works faster than humans, and that too with no errors. But before choosing any software, don’t forget to ask these questions to yourself:
- What areas of business do you want to cover?
- Find out the tasks that take most of your time.
- What are the most repetitive, time-consuming, and tedious tasks?
After finding the answers to these questions, you can choose the best software that meets your business needs.
Outsourcing for repetitive tasks is one thing, but what about infrequent tasks? In this situation, freelance workers come forward to fill that gap for the jobs you don’t need to perform all the time. You don’t need a full-time worker if a mission is infrequent. For instance, if you need a graphic designer twice or thrice a year, it’s better to hire a freelancer for less than half the money. So, businesses that scale up or down fast should hire freelance workers on a project basis, as it’s the best way to keep the cost down.
Pay bills in advance:
Some vendors offer discounts if you pay your bills and invoices early. So, saving 2%-3% can add up so much and bring down costs. For instance, if in one year the operating cost is $100,000 and you take advantage of paying invoices early, it can save up to $2000 a year. So, make sure you are paying invoices on time, as it’s the best way to avoid a late fee and unnecessary penalties.
Apart from this, here are a few other tips that you can use to reduce the operating cost of any business.
- Try digital marketing instead of traditional marketing techniques
- Hire interns
- Shop around when it’s the best time
- Ask your employees for ideas
- Cut down the office costs
- Review business expenses and revenues regularly
- Cancel services that you aren’t using anymore
- Invest in technology
- Monitor and adjust changes in business
Organizations can boost their profit by spending rationally and calculating the operating cost ratio on time. This way, companies can check and monitor their efficiency before it’s too late. You only need to take notes of inefficiencies and work on the solutions.